TY - JOUR
AU - Robinson,Tim
AU - Stone,Andrew
TI - Monetary Policy, Asset-Price Bubbles and the Zero Lower Bound
JF - National Bureau of Economic Research Working Paper Series
VL - No. 11105
PY - 2005
Y2 - February 2005
DO - 10.3386/w11105
UR - http://www.nber.org/papers/w11105
L1 - http://www.nber.org/papers/w11105.pdf
N1 - Author contact info:
Tim Robinson
Melbourne Institute of Applied Economic
and Social Research
Faculty of Business and Economics
University of Melbourne
Victoria 3010
AUSTRALIA
Tel: +61 3 8344 2325
E-Mail: tim.robinson@unimelb.edu.au
Andrew Stone
Reserve Bank of Australia
65 Martin Place
Sydney NSW 2000
AUSTRALIA
Tel: 61-2-9551-8841
Fax: 61-2-9551-8833
E-Mail: stonea@rba.gov.au
M1 - published as Tim Robinson, Andrew Stone. "Monetary Policy, Asset-Price Bubbles, and the Zero Lower Bound," in Takatoshi Ito and Andrew K. Rose, editors, "Monetary Policy with Very Low Inflation in the Pacific Rim, NBER-EASE, Volume 15" University of Chicago Press (2006)
AB - We use a simple model of a closed economy to study the recommendations of monetary policy-makers, attempting to respond optimally to an asset-price bubble whose stochastic properties they understand. We focus on the impact which the zero lower bound (ZLB) on nominal interest rates has on the recommendations of such policy-makers. For a given target inflation rate, we identify several different forms of `insurance' which policy-makers could potentially take out against encountering the ZLB due to the future bursting of a bubble. Even with perfect knowledge of the bubble process, however, which of these will be optimal varies from one type of bubble to another and, for certain bubbles, from one period to the next. It is therefore difficult to say whether the ZLB should cause policy-makers to operate policy more tightly or loosely than they would otherwise do, while a bubble is growing -- even after abstracting from the informational difficulties they face in practice. We also examine the implications of the ZLB for policy-makers' preferences as to their inflation target. Policy-makers who wish to avoid concerns about the ZLB should take care not to set too low a target -- especially if the neutral real interest rate is low.
ER -